Shorts Have Dim View of Sunrise Technologies' Success

When investors visited Sunrise Technologies International (SNRS Quote) last week, they had one thing on their minds -- whether the company's surgical laser for farsightedness produced long-lasting results. Sunrise told them they had nothing to worry about.

Russ Trenary, the Fremont, Calif., company's president and chief executive, walked to a white board and discussed data on a graph that showed patients only had a brief period of regression but then stabilized for the long term, according to three people who were present.

The investors were heartened, especially with a pivotal Food and Drug Administration panel meeting on the technology coming up July 22. The graph looked even better than data from entrenched competitors like Visx (VISX Quote) and Summit Technology (BEAM Quote).

But afterwards it only took a glance at the company's own Web site to raise serious questions about the graph that had been drawn for them. A graph on the Web site shows that patients' eyes continue to lose the laser's effect out to 18 months.

Charting Sunrise
This graph, from the company's own Web site, isn't as favorable as the one the company drew for investors last week. -- J.E.

"I know that when I came away from the meeting, I said, 'After six months, patients stabilized. That's great.' After I read the data on the Web site, I had a different impression," says a West Coast hedge fund portfolio manager who attended the meeting. The manager has no position in Sunrise.

Another attendee, an analyst for a hedge fund that has a "boxed" position (a short position that is protected), says: "I don't think it was consistent with what's shown with the other data."

Would the real data stand up? How does the company explain its white board whitewash? Ed Coghlan, the company's investor relations chief who was at the meeting, says, "I believe the people in the audience are mistaken." He added, "The substantive discussion of our data will occur next Thursday" at the FDA meeting.

Sunrise's Rise

Sunrise's stock has been hugely popular of late, having risen more than 200% this year to about 19 a share as the market for corrective laser surgery has boomed. The company now sports a market cap of $1 billion solely on the promise of its new type of laser for certain eye surgeries. Competitors like Visx have what's known as an excimer laser, which allows doctors to use a technique called LASIK for near- and farsightedness. Sunrise is developing a holmium laser, which the company says is less invasive but only works for farsightedness.

But the company faces a big hurdle at the FDA to get its new laser approved and an even bigger one in the marketplace, argue skeptics. Four investors who are either short or considering shorting the company and two sell-side analysts interviewed for this article question Sunrise's data on effectiveness, particularly involving how fast and by how much patients lose the laser's effect -- the very area the company seems to have made rosy in its meeting with investors.

Even if the laser is approved, the initial market will be so narrow and the competition so entrenched, Sunrise has little chance, they contend. An early June report from a boutique firm, Sturza's Institutional Research, said: "We believe the product will be a commercial failure, due to its limited efficacy and inability to treat most refractive disorders." The firm rates the company a sell. Evan Sturza, who also runs a separate hedge fund, declined to comment on his position.

Sunrise says its laser is safe and effective and will have advantages. Coghlan, the investor relations chief, says competing procedures are invasive and difficult to perform. With Sunrise's laser, no tissue is cut or removed. It's easier for doctors to use its laser than those from competitors. Added to that, Coghlan says, is that there's room for all: "The market size is breathtaking."

FDA Showdown

Before it can get to the market, however, Sunrise's laser must get past the FDA. It's unknown how the panel will react to the fact that nine of the 11 chief clinical investigators listed on its own Web site have purchased sizable stakes in Sunrise, which was brought to light by TSC.

I'm Not Just an Investigator, I'm Also an Investor Nine of 11 main investigators on Sunrise's farsightedness laser have investments in the company.
Investigators	Common shares granted*
David C. Brown	2,481,847
Donald R. Sanders	2,283,519
Alan B. Aker	1,948,109
Manus C. Kraff	1,003,931
Robert Gale Martin	677,840
Paul H. Ernest	77,353
Douglas G. Koch	13,500
Sandra C. Belmant	7,500
Peter J. McDonnell	5,000
*Beneficially owned. Source: Sunrise, SEC document of September 1998.

Coghlan sees no problem. "Does anyone really think that any of our clinical investigators, who are among the most respected names in ophthalmology, would do anything to hurt their reputations?" he asks.

Well, the FDA, for one, thinks it possible. In an overhaul of its policy on financial disclosure by clinical investigators, the agency wrote in March that it "has become increasingly aware of the existence of potentially problematic compensation arrangements between sponsors of FDA-regulated products and clinical investigators. ... These arrangements clearly have the potential to bias the results of clinical studies."

If the panel and the agency get past that, they may have other questions for Sunrise. The shorts say the laser is unpredictable and loses effect. The patients did lose some of the effect of the surgery. The trials had a wide definition of "stability," which the FDA or the panel may not care for.

Further, while other companies attempted to correct their patients back to normal 20/20 vision or close to it, Sunrise simply measured its patients on how much its laser improved a patient's vision. This is a liberal definition of efficacy, say the short-sellers. Also, the company, on its own Web site, has different numbers of patients for different slides of data. Differing numbers of patient in different slides is often a "tell," a signal that everything isn't right about the data.

About a 10th of patients were "dissatisfied" at six months, according to the company's Web site. But the data exclude 15 patients who had "unrealistic expectations," which may not be statistically acceptable to the FDA. What's more, the company also used a slightly different protocol for its Phase III trial from its Phase II, a change that can sometimes bode ill.

Coghlan stands by the data and says Sunrise will prove its lasers safe and effective at the panel meeting.

Approval Still Likely

Despite all this, short-sellers are resigned to the fact that Sunrise may actually win approval. The laser is safe, they say, and the devices division of the FDA has lower standards than the drug division.

Yet even if Sunrise gets past the panel, it's no sure thing. The whole market for laser corrective surgery is booming, certainly. But will docs want to use such a specialized laser? Further, the company is initially only up for approval in patients with mild farsightedness, only a niche of the large farsightedness market.

Short-sellers think they have two ways to win: Either the FDA dings Sunrise or the market does. And that could mean dawn turns to dusk for Sunrise holders faster than they might think.